After a yr of double-digit inflation in lots of countries, UBS is now forecasting “sharp” disinflation in 2023. The Swiss investment bank says weak growth alongside “mechanical” indicators, comparable to easing supply chain bottlenecks and rising goods inventories, will reduce the inflation rate next yr — also referred to as disinflation. The U.S. consumer price index data on Thursday showed the annualized rate of inflation in the US fell to 7.7% in October , down from 8.2% in September. “Our baseline is one where growth is weak and inflation declines rapidly,” the bank said in its Global Economics & Markets Outlook for 2023 on Nov. 7. “Numerous the disinflation is mechanical and might be right down to luck (food+energy), but we imagine most pipeline indicators now suggest the U.S. and others are clearly shifting right into a more disinflationary environment.” The bank screened for stocks it expects to be positively impacted in such an environment. The table below shows two stocks across 4 regions that UBS says will profit probably the most from disinflation. The bank recommends being obese health care, communication services and knowledge technology, while being underweight energy, industrials and financials in a disinflationary environment. British healthcare firms Genus and Hikma Pharmaceuticals ranked highly among the many stocks UBS says will profit from disinflation in the UK. Median analyst price targets give the stocks potential upside of 29.7% and 38.5% respectively, in keeping with FactSet. UBS’ screen also indicated that Danish health equipment maker Ambu and Belgian supermarket retailer Colruyt might be probably the most positively impacted by disinflation within the European Union. Chinese stocks comparable to food ingredients maker Yihai International and education services provider Recent Oriental stood out within the Asia Pacific region, while American bond trading platform MarketAxess and household products maker Clorox ranked highly among the many North American stocks UBS expects to profit from disinflation. The Swiss bank admitted that if its forecasts are unsuitable on inflation, nonetheless, the downside could be significant. “The negative payoff from getting our disinflation call unsuitable is large,” strategists led by Arend Kapteyn warned. They said the “sweetest spot” for markets, historically, was when core inflation hit an annualized rate of 1.8% — a level the bank expects in 2024. “If we’re unsuitable,” the analysts said about their forecast, “the valuation adjustment needed would see the S & P 500 at 2,550.” “Few places to cover then, but dollar assets, particularly the U.S. Value trade, should do least worst.” The S & P 500 closed at 3,992.93 on Friday.
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